GAP Berlin Günes Orak, Evgeni Petkov and Stefan Schulz Restructuring of the Value Chain of the European Ground Handling Market after the EU market liberalization

GAP Berlin

Günes Orak, Evgeni Petkov and Stefan Schulz

Restructuring of the Value Chain of the European Ground Handling

Market after the EU market liberalization

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Contents

1. Introduction

2. The European Council Directive 96/67/EC

3. Theoretical Background and Propositions

4. Ground Handling at the Major European Airports

5. Impact on Prices and Quality, Winners and Losers in Europe

6. Transformation of Ground Handling in Germany

7. Conclusion

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1. Introduction

GHS are divided in 5 Categories:

- Ramp handling

- Baggage handling

- Fright/mail handling

- Fuel oil handling

- Passenger handling

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1. Introduction• Definition Ground Handling

Source: Fraport AG

1. Introduction

Questions arising after the liberalization of the market:

• How did the market change?

• How did prices and quality change?

• How did the organization of the value chain change?

• Who benefited and who losed from the changes?

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Source: Fraport AG

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2. The European Council Directive 96/97/EC

Source: SH&E Study


Value Chain of GH:

Airport

↓Handler

↓

Airline

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Before the implementation of the Directive:

• monopoly of backward integrated national airline,• monopoly of forward integrated airport, and • duopoly or oligopoly of independent ground handlers and

self-handling airlines

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Transaction costs are :

“the costs of acquiring an input over and above the amount paid to the input supplier.”

Include:

• costs incurred before making the contracts (search and bargaining costs),

• opportunity cost of forgone transactions,

• costs incurred after making the contracts (enforcing costs)

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Determinants of transaction costs are :

• the frequency of the contracts between two parties,

• the specificity of investments made for the supply

relationship,

• environmental or behavioral uncertainty

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Based on the determinants of transaction costs Fuhr (2005) made his propositions about how the GHS should be organized and tested them on both hub and spoke airports

Proposition 1 (regarding transaction frequency) :Weak vertical control with short to mid-term contracts is feasible for spoke airports, whereas strong vertical control (eg. self handling) is only feasible for HSC at their hub and secondary airports.

Result: Strong vertical control is suitable for hub airports.


Proposition 2 (regarding enviromental uncertainty) :

The contractual form between the hub airport and the handler is of moderate vertical control, whereas the contractual form between the secondary or spoke airport and the handler is of weak vertical control.

Result:

Weak vertical control is suitable for secondary and spoke airports.


Propositions 4&5 (regardin asset and human capital specifity):

There is a large hold up threat in relationships between HSCs and handler, and a medium hold up threat in relationships between secondary airports and handler.

Result:

High hold up threat is expected at hub airports due to high asset and human capital specificity. However this threat is at a medium level at secondary airports.

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4. GHS at the Major European Airports

We look at the GHS market after the liberalization on the six

largest airports in Europe:

• London Heathrow (LHR)

• Paris Charles de Gaulle (CDG)

• Frankfurt (FRA)

• Amsterdam Schiphol (AMS)

• Madrid Barajas (MAD)

• Rome Fiumicino (FCO)


Airport LHR CDG FRA AMS MAD FCO

PAX (2004) 67.3 51.3 51.1 42.5 38.7 28.1

Ex-ante situation

8 airlines doing self- and 3rd party GH

Duopoly of airport and Air France

Monopoly of FRAPORT

KLM doing self- and 3rd party GH

Monopoly of Iberia

Monoply of the airport

Total # of handlers (ramp)

11 5 2 5 5 3

Airport doing GH

no yes yes no no yes

Self-handling airlines

7 1 0 2 4 2

Independent handlers

4 3 1 3 0 0

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Market shares at London Heathrow:

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Market shares at Paris Charles de Gaulle:

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Market shares at Frankfurt:

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Market shares at Amsterdam Schiphol:

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Market shares at Madrid Barajas:

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Market shares at Rome Fiumicino:

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Barriers to competition:

Capacity constraints are used as a motive for limiting on allairports. This was supposed to change with a revision ofthe Directive, which is, however facing strong opposition, and most likely will not be voted soon.

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In 2002 SH&E conducted a study on prices and quality onbehalf of the EU.An increase in prices was reported only from Brussels andManchester.Largest decreases were reported from Lyon, Lisbon andAthens – up to 50%.Reports on quality were ambiguous, however we canconclude that quality stayed more or less the same.

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Airlines were the clear winners of the liberalization.Unfortunately, the gains were not noticed by thepassengers, due to the fact that GHS costs are only 4-7% oftotal flight costs.Another winner were the independent handling companies,which gained market shares after the market oppened.

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Expectedly, the former monopolists lost significant marketshares and profits.Due to the labor intensity of Ground Handling, employeeswere also among the losers of the market opening-independent handlers were reported to pay up to 30% lowerwages.

6. Transformation of GH in Germany

Before the Directive airports were monopolists in Ground Handling

After the implementation of the Directive in 1997 there have been changes, but the market seems to be less open than other European markets

Regulators try to protect airports and their employees from competition


• The market for the airside services, such as ramp handling, is still quite protected [this includes luggage handling and mail, refuelling and other ramp services such as push out, etc]

• The market for the landside services such as check in,

cleaning, maintenance, bus transfer, catering and all the associated services like station and crew support is less strictly regulated.


Market entry in Germany is controlled through: • the criteria for the selection of service providers or self

handlers that we also have observed in the other countries,• the administrative rules set down by the regional state

regulator for the airport user council involved in the selection procedure

• The maximum number of service providers allowed for each service (usually not more than 2) The expected revision of the service directive in 2007 would allow to increase this number to 3 or 4


Major feature of the German market:

Airports stay in the business, but through GH subsidiaries. Hamburg, Hannover und Düsseldorf were early movers in creating own subsidiaries while Cologne and Frankfurt continue with their current organizational arrangement in which GHS are fully integrated within the core airport organisation


Why subsidiaries?

The European Commission requires subsidiaries for cost transparency – no cross subsidisation

German airports are doing it on order to move out of the inflexible and expensive old labor contracts


Differences between the “old“ and “new“ employees:

- “old” paid as public service employees- “new” paid similar to logistics or cleaning sector

employees- difference also in retirement provisions


Evidence on changes in flexibility- Stuttgart 2004:


Evidence on changes in flexibility- Stuttgart 2005:


New entrants in Germany:

International service providers like Acciona, Swissport, Avia Partner, Securicor, or Menziees and local service providers like Losch

Airports created AHS, a service company owned by several airports active in landslide services like check-in, in order to achieve scale economies like those specialized companies achieve


Questions about the development of GH in Germany:

Is it just a question of who can pay lower wages?

When will the airports be able to move completely out of the old labor contracts?

Why do airports want to stay in that business?

How do we measure efficiency in GH?

What will happen if the market opens completely?

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7. Conclusion

Directive had varied success in the different countries, since some important barriers to entry still exist, mostly due to capacity constraints and the short license period

Transformation of GH in Germany is slower and has different patterns than in other countries

Labor costs and labor organization seem to be crucial for success and survival in that business

Strong opposition to further opening of the market, mostly from labor unions

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Thank you for your attention!

Documents

GAP Berlin Günes Orak, Evgeni Petkov and Stefan Schulz Restructuring of the Value Chain of the European Ground Handling Market after the EU market liberalization